2010 Annual Report - about.usps.com2 2010 Annual Report United States Postal Service Financial Highlights 2010 was a difﬁ cult year for both the U.S. economy and the Postal Service

2010 Annual Report United States Postal Service 1

Table of Contents

2 Financial Highlights

4 The Foundation For Our Future: Letter from the Postmaster General and CEO, and the Chairman of the Board of Governors

6 Foundation For The Future

7 Overview of the 10-year Plan

8 Progress Against the Plan: Our Checklist

9 Retiree Health Benefi ts Prefunding

10 Delivery Frequency

11 Expand Access

12 Workforce

13 Pricing

14 Expand Products and Services

15 Oversight

16 The Board of Governors

18 The Executive Committee

20 Message from the Audit and Finance Committee

22 Message from the Chief Financial Offi cer and Executive Vice President

24 Stamps By Design: The 2011 Commemorative Stamp Program

28 Introduction to the Financial Section

29 Business

33 Risk Factors

37 Properties

38 Management’s Discussion and Analysis of Financial Conditions and Results of Operation

60 Controls and Procedures

61 Report of Independent Registered Public Accounting Firm

63 Financial Statements

68 Notes to the Financial Statements

81 Operating Statistics

85 Financial History Summary

86 Selected Quarterly Financial Data

87 Glossary

2 2010 Annual Report United States Postal Service

Financial Highlights

2010 was a diffi cult year for both the U.S. economy and the Postal Service. As the economy weakened, mail volumes and revenue continued to decline. The Postal Service met the challenge with focused cost reductions and increased effi ciency.

Years ended September 30 Percent change from preceding year

The past year in review

2010 2009 2008 2010 2009 2008

(Dollars in millions, audited)Operating revenue $67,052 $68,090 $74,932 (1.5%) (9.1%) 0.2%

Operating expenses * $75,426 $71,830 $77,738 5.0% (7.6%) (3.0%)

Loss from operations $(8,374) $(3,740) $(2,806)

Operating margin (12.5%) (5.5%) (3.7%)

Net loss $(8,505) $(3,794) $(2,806)

Purchases of capital property $1,393 $1,839 $1,995 (24.3%) (7.8%) (26.5%)and equipment equipment

Debt $12,000 $10,200 $7,200

Interest expense $156 $80 $36

Capital contributions of $3,132 $3,087 $3,034U.S. government

Defi cit since reorganization $(17,005) $(8,500) $(4,706)

Total net defi ciency $(13,873) $(5,413) $(1,672)

(Unaudited)Number of career employees 583,908 623,128 663,238 (6.3%) (6.0%) (3.1%)

Mail volume (pieces in millions) 170,574 176,744 202,703 (3.5%) (12.8%) (4.5%)

New delivery points served 739,580 923,595 1,199,764

*The net impact of P.L. 111-68 legislation was $4 billion reduction of expenses in 2009.


Volume Forcasts to 2020

110

120

130

140

150

160

170

180

190

200

210

220 Base Case

Worst Case

Global Bargain

2010 First-Class Mail Letter Equivalent Prices in U.S. Dollars

1.50 Norway

.97 Japan

.79 France

.75 Germany

.66 Great Britain

.57 Canada

.44 United States

Changes in Volume and Contribution of the Two Largest Mail Classes

2010

2020

2010

2020

52

8883

78


Letter from the Postmaster General and CEO, and the Chairman of the Board of Governors

John E. PotterPostmaster General and Chief Executive Offi cer

Louis J. GiulianoChairman, Board of Governors

To the President, members of Congress, postal customers, postal employees, and the American people:

This past year has been a pivotal one for the U.S. Postal Service, as we have set about the ambitious task of turning a fi nancial crisis of signifi cant proportions into an equally sizable opportunity. While we continued to contend with the signifi cant marketplace and fi nancial challenges that began with the 2008 economic recession, in this past year we took signifi cant steps to lay the foundation for an historic redi-rection for the organization.

Our work began in earnest early in the fi scal year by asking fundamental questions about trends in America’s use of the mail, and what the future holds for our business. We commis-sioned independent projections and analyses, which described a marketplace increasingly migrating to digital means of communication, a steady decline in mail volumes through 2020, and a less profi table mix of mail in coming years. Indeed, without signifi cant productiv-ity improvements and changes to our current business model, the Postal Service could face a cumulative $238 billion shortfall in the com-ing decade.

The Foundation for Our Future

Our response to this challenge was to set forth an aggressive and balanced plan that envisions signifi cant changes to our business model, enables the Postal Service to continue to play its vital role in the American economy, and our communities, and to deliver great value to business and residential customers. We also committed to engaging the American people in a dialogue about our plan and our future.

We began this dialogue in early March, when we released: Ensuring a Viable Postal Service for America: An Action Plan for the Future. This document set out our goals for cost-cutting, increased productivity, product and service of-ferings, and identifi ed legislative and regulatory changes necessary to ensure our future viability and a return to profi tability. Most importantly, it set the foundation for a more competitive, market-responsive organization, better able to meet the evolving mailing needs of the Ameri-can people.

Since March, we have continued to com-municate about our plan, and we have made meaningful progress in a number of areas.

■ We asked Congress to examine our retiree health benefi ts prefunding obligations and to consider legislation to address overpayments to the Postal Service’s Civil Service Retire-ment System (CSRS) pension fund. Restruc-turing retiree health benefi ts payments to the “pay-as-you-go” method used by the rest of government and the private sector would re-sult in an average of $5.65 billion in additional cash fl ow each year through 2016. Likewise, transfer of the excess CSRS contributions to the health benefi ts fund could signifi cantly reduce, or offset entirely, future prefunding requirements.

■ We submitted a fi ling with the Postal Regula-tory Commission, seeking an advisory ruling on a fi ve-day delivery schedule to better refl ect current mail volumes and customer usage. Survey data show that the public supports a fi ve-day delivery schedule to strengthen the fi nances of the Postal Service.



Louis J. GiulianoChairman, Board of Governors

■ We implemented a strategy to modernize our retail network while expanding access to postal products and services. Increasing and enhancing customer access through partnerships with retailers, use of kiosks and self-serve options in high-traffi c areas, and improved online offerings will allow us to provide more convenient and effi cient service for our customers.

■ We have taken steps to establish a more fl exible workforce that is better-positioned to respond to changing demand patterns and to ensure we have the right people in the right place for optimal effi ciency. We have engaged in this year’s labor negotiations with this goal in mind, and have every confi dence that, together, we can better position the organization for the future.

■ We sought to increase prices for our Mailing Services products using the exigency provi-sion of the Postal Act of 2006. Although the request was denied, we will continue to seek the authority to price our products appropri-ately in the marketplace.

“Since March, we have continued to communicate about our plan, and we have made meaningful progress in a number of areas.”

■ We expanded our array of products and services. We continued to build on the suc-cess of our Priority Mail Flat Rate shipping campaign by introducing additional fl at-rate products and enhancing successful Standard Mail initiatives like seasonal incentives.

■ We continue to seek greater fl exibility in our current oversight structure to improve our speed to market through a streamlined price and product approval process.

■ We continued an aggressive pace of cost-cut-ting. Building on record savings of more than $1 billion every year since 2001 and reducing our total costs by $3 billion in 2010, on top of the $6 billion in savings achieved last year.

The fi rst steps in a new direction are often the hardest, and success tomorrow depends upon our willingness as an industry to take those initial risks today. We are committed to our vision of a more nimble, competitive and fi nancially sound Postal Service, an organization that will endure as a cornerstone of American society, providing unparalleled service through “snow, rain, heat and gloom of night” for generations to come.


Postmaster General John E. Potter’s keynote presentation at “Envisioning America’s Future Postal Service,” a stakeholder policy conference held March 2, 2010 in Washington, DC.

Retiree health Prefunded retiree health benefi ts requirement “Pay-as-you-go” retiree health benefi ts in line benefi ts with other government and private institutions

Delivery Mandated 6-day delivery regardless of changing Flexibility to adjust delivery frequency to match frequency volume volume and changing customer needs

Access Primarily 9 am-5 pm brick-and-mortar Expanded access through an enhanced online Post Offi ces presence, partnerships and kiosks

Workforce Limited fl exibility to adapt to market and Flexibility to capture natural attrition to match technology changes changing demand

Pricing Strict infl ation-based price caps by class Flexible pricing refl ecting market dynamics

Products Restricted to postal products Flexibility to introduce additional products consistent with broader mission

Oversight Multiple bodies with overlapping roles and Streamlined approach to oversight responsibilities and lengthy process

TODAY TOMORROW LIMITED ABILITY TO RESPOND TO MARKET CHANGES FLEXIBILITY TO RESPOND QUICKLY TO EVOLVING MARKET

Postal Service of the Future


BUSINESS PLAN: PROPOSED ACTIONS CUMULATIVE VALUE 2010–2020

Actions Within USPS Control + $80–123B

Retiree Health Benefi ts + $0–50B

Delivery Frequency + $0–40B

Expanded Access + $0–10B

Workforce + TBD

Revenue (Pricing & Products) + $0–158B

REMAINING GAP (from $238B) $0B

On March 2, 2010, the U.S. Postal Service embarked on a new journey, unveiling a robust action plan for a return to profi tability and long-term fi nancial strength. The plan

presented was based on extensive analysis and mail volume projections by highly respected, independent consultants. They confi rmed that absent fundamental, structural change to its cur-rent business model, the Postal Service will likely face cumula-tive losses that could reach more than $238 billion by 2020.

Against this static backdrop, we presented and have been working diligently to implement an ambitious, yet achievable, plan to shape our future. Our plan consists of two complemen-tary but distinct categories of necessary action: actions that are within management control, that is, that can be taken by the U.S. Postal Service without the need for regulatory or legisla-tive intervention; and those structural, systematic changes that require regulatory or legislative action to implement.

The fi rst category of changes, those within management control, could reduce our projected gap by $123 billion. By themselves, these changes are not enough. The remaining $115 billion gap can be closed only through legislative, regulatory, and labor changes that would afford the Postal Service suffi cient fl exibility to continue to fulfi ll its mission to the American people without additional cost to taxpayers.

This second critically important category of changes includes: (1) Restructuring the Postal Service’s unique obligation to prefund retiree health, particularly given overfunding of CSRS and FERS pensions; (2) Adjusting delivery days to better refl ect current mail volumes and customer usage; (3) Modernizing our existing retail network so that customers can access postal products and service where they are; (4) Establishing a more fl exible workforce that is better positioned to respond to chang-ing demand patterns; (5) Ensuring adequate pricing to respond to market demand and help cover costs; (6) Permitting the Postal Service to better respond to changing customer needs through the expansion of product and service offerings, and (7) Reinforcing these changes with more clearly defi ned, appropri-ate, agile oversight roles and more streamlined processes.

The current situation presents a tremendous challenge for the Postal Service, while also presenting a tremendous opportu-nity. With the unveiling of this ambitious, multi-faceted plan, we have begun laying a solid foundation for long-term success. We have made measurable progress in 2010 and look forward to working with our stakeholders, including the Congress and the Administration, to ensure a viable, fi nancially sound, and market responsive Postal Service for the future. ■

Overview of the 10-year plan

Delivering the Future


Throughout 2010, the Postal Service took many positive steps to imple-ment its Action Plan. The next pages describe this important progress

PROGRESS AGAINST THE PLAN

OUR CHECKLIST

Delivery Frequency

Expand Access

Workforce

Pricing

Expand Products and Services

Oversight

Retiree Health Benefi ts Prefunding


U nlike any other public or private entity, under a 2006 law, the U.S. Postal Ser-vice must prefund retiree health benefi ts.

We must pay today for benefi ts that will not be paid out until some future date. Other federal agencies and most private sector companies use a “pay-as-you-go” system, by which the entity pays premiums as they are billed. Shifting to such a system would equate to an average of $5.65 billion in additional cash fl ow per year through 2016, and save the Postal Service an estimated $50 billion over the next ten years. With the announcement of our Action Plan in March, we began laying the foundation for change, requesting that Congress restructure this obligation.

The prefunding requirement, as it cur-rently stands, contributes signifi cantly to postal losses. Under current law, the Postal Service must follow a mandated prefunding schedule of $5.4 billion to $5.8 billion per year through 2016. In 2009, Congress granted a much needed deferral, allowing us to pay $4.0 billion less than the orignally required $5.4 billion pay-ment. This year, Congress opted not to provide this deferral.

In the absence of legislative relief, the Postal Service was required to make — and made — this year’s $5.5 billion payment to the Retiree Health Benefi t Fund. We had sought a deferral of this payment to minimize the risk of default-ing on fi nancial obligations in fi scal year 2011. This risk remains. Even with the careful stew-ardship of resources we are committed to in


OUR CHECKLIST

Retiree Health Benefi ts Prefunding

the coming year, current forecasts anticipate insuffi cient cash to enable the similar $5.5 billion payment in September 2011.

Given the severity of our fi nancial situation and the fact that we already have implemented aggressive cost-cutting and productivity-improving measures, we continue to seek approval from Congress to shift away from our unique retiree health benefi ts prefunding mandate. We are committed to upholding our obligation to current and former employees but wish to do so in a way that does not constrain cash fl ow during diffi cult fi nancial periods of declining volume.

Ensuring that the Postal Service remains a viable business depends upon elimination of legislatively-imposed constraints that impede our effi cient and profi table operation. Congres-sional action, both to restructure our obligation to prefund retiree health benefi ts and to address overpayment to our Civil Service Retirement System pension fund, is still urgently needed. ■

CHALLENGE

Signifi cant fi nancial losses result from a legislative requirement that the Postal Service prefund its retiree health benefi ts.

SOLUTION

Adopting a traditional “pay-as-you-go” method would produce an average of $5.65 billion in additional cash fl ow per year through 2016.

Addressing our Retiree Health Benefi t prefunding obligations will improve our long-term fi nancial strength and ensure a viable Postal Service for the future.

-0.2

No price increase 2003–06 Net income without RHB

USPS is experiencing unprecedented losses

1 Includes one-time deferral relief of $4 billionNote: All years refer to Fiscal Years ending on Sept. 30

POSTAL SERVICE NET PROFIT/LOSS $ Billions

0.93.1

1.43.9

3.3 2.8

-2.4

-3.8

-1.41

-0.7-2.8

5.65 5.5

-1.7

-5.1

8.4

2000 01 02 03 04 05 06 07 08 09 2010

-8.5

Retiree health benefi ts prefunding is driving

losses

Retiree Health Benefi t (RHB) prefunding $ billions

-3.0


T hroughout 2010, the Postal Service sought to engage its stakeholders — including its customers, regulators,

Congress, and the American people — about altering the frequency of delivery to a fi ve-day-a-week schedule. We are currently required to deliver to more than 150 million addresses six days a week at a cost of almost $30 billion per year. Reducing delivery days to 5 days per week will substantially decrease our highest cost activity and better match costs with declin-ing volumes.

On March 30, based upon extensive feedback from our customers and analysis of impacts to the Postal Service, we submitted a fi ling to the Postal Regulatory Commission (PRC) regarding plans to make this important transition.

Mail volumes are generally at their lowest on Saturdays and more than a third of U.S. busi-nesses are closed on Saturdays. A national Gal-lup Poll found that businesses and households believed Saturday would be the least disruptive day to eliminate mail delivery.


OUR CHECKLIST

Delivery Frequency

Indeed, the same Gallup survey showed that two-thirds of Americans would rather have delivery days reduced than have increases in postage or have the government subsidize the Postal Service’s losses with taxpayer funds. Reducing street delivery to fi ve days would help rebalance postal operations with the needs of today’s customers, while saving the Postal Service more than $3 billion a year, and reduce our energy use and carbon emissions.

Nearly all Saturday mail operations would continue even if we transition to a fi ve-day delivery schedule. Post Offi ces would remain open on Saturdays, access to P.O. boxes would continue, Express Mail would continue to be delivered seven days a week, and incoming mail would still be processed. Only Saturday street delivery would be suspended.

In order for the fi ve-day delivery plan to become reality, Congress must discontinue an existing legislative impediment. In the past six months, the Postal Service has taken important steps toward this goal. In addition to fi ling the fi ve-day delivery plan with the PRC, the Postal Service is preparing for implementation and has taken every opportunity to demonstrate the importance to Congress of transitioning to a fi ve-day delivery schedule as a vital part of strengthening the fi nancial condition of the Postal Service. ■

CHALLENGE

Mail volume deliveries no longer cover the costs of a six-day delivery schedule.

SOLUTION

Moving to a fi ve-day delivery schedule would signifi cantly reduce our costs with minimal disruption to customers.

Public Opinion Regarding Delivery Frequency

Source: Gallup Poll June 17-18, 2009

WOULD YOU STRONGLY FAVOR, FAVOR, OPPOSE OR STRONGLY OPPOSE REDUCING THE NUMBER OF MAIL DELIVERY DAYS FROM 6 DAYS TO 5? Share of respondents, percent

21014

23

52

stro

ngly

favo

r

stro

ngly

oppo

se noop

inio

n

favo

r

oppo

se

The Postal Service delivers to more than 150 million delivery points on a typical workday.


In our March 2, 2010 Ensuring a Viable Postal Service for America: An Action Plan for the Future, the Postal Service high-

lighted the need for expanded access to postal products and services to meet the changing needs and behaviors of customers and provide services in locations already frequented by customers. We outlined a plan to accomplish this goal through partnerships, kiosks, and im-proved online offerings, all while reducing costs through a more effi cient network. Here too, 2010 has proven to be a year of progress.

In August, we announced a new partnership with Offi ce Depot to make Postal Service ship-ping and mailing products available at almost 1,100 Offi ce Depot stores across the country. Now customers, especially small business customers who are already visiting Offi ce Depot stores, will have more convenient access to Priority Mail Flat Rate boxes and envelopes, Express Mail, Parcel Post and stamps.

This is just one way in which we are modern-izing the existing retail network to better match the changing needs of our customers, while effi ciently managing costs. In the past year, we have also improved and expanded our online offerings, allowing greater numbers of custom-ers to access a full range of postal services from the convenience of their homes or busi-nesses. In addition, we continue to expand access to stand-alone kiosks and explore ad-ditional retail partnerships and to expand online offerings via USPS.com.

Providing more convenient access to postal products where customers live, work and shop will ultimately allow the Postal Service to operate with much more effi ciency. Once a robust network of alternative, better-situated retail access points has been established, we can thoughtfully assess less frequented ac-cess points, and determine whether they are still needed. Closing redundant facilities would allow signifi cant and valuable cost savings necessary for future viability.

The American public supports this shift to greater access where it is most convenient. Current customer research has revealed that


OUR CHECKLIST

Expand Access

79 percent of Americans surveyed were not concerned about closing Post Offi ces if postal services were available at other retail loca-tions. Many actually preferred to have these services available in locations where they are already shopping during expanded hours in many cases. Since the Postal Service does not receive appropriated funds to maintain its net-work, closing redundant facilities also protects customers from the higher costs they might otherwise experience if these unused facilities were to remain open.

With the announcement of the Offi ce Depot partnership, among other initiatives, in 2010 we have established a fi rm foundation for our vision of convenient, cost-effi cient access to our prod-ucts and services. We will continue to pursue these partnership opportunities, as well as other access innovations, to provide customers with the services they need, when and where they need them. ■

CHALLENGE

The existing postal branch network is expensive to maintain and neither profi table nor convenient.

SOLUTION

Reduce costs and enhance revenue by shifting retail locations from brick and mortar Post Offi ces to kiosks and retail partners in existing high-profi le shopping areas.

Survey Data: Consumer Acceptance of Retail Service Options

HOW WOULD IT AFFECT YOU IF THE POST OFFICE NEAREST TO YOUR HOME CLOSED AND ITS SERVICES MOVED TO A USPS SERVICE COUNTER AT A NEARBY STORE? Share of respondents, percent

Source: Consumer survey, December 2009, conducted by McKinsey

913

2024

35

a be

nefi t

an in

conv

enie

nce

I wou

ld n

otic

e fo

r a

long

tim

e

a se

rious

pro

blem

or

han

dica

p

no a

ffect

on

me

an in

conv

enie

nce

I cou

ld a

dapt

to

rela

tivel

y ea

sily

USPS products and services are increasingly available via kiosks and other non-traditional access points.



OUR CHECKLIST

Workforce

O ver the past few years we have made great progress in aligning our workforce to the lower mail volumes we are expe-

riencing. We have been fortunate to be able to do so almost entirely through the orderly attrition of retiring workers, rather than through a disrup-tive process of lay-offs.

Over 39,000 career employees retired or departed on their own last year, and we are well positioned through attrition to reduce the size of our workforce at rates that match the pro-jected future decline in mail volumes. Based on current trends we project that nearly 300,000 Postal Service career employees will become eligible to retire in the coming decade – each year we expect approximately fi ve percent of employees will elect to retire.

However, reducing total headcount is only one part of the equation. Marketplace demands require that we have a more fl exible workforce that allows for a greater ability to reposition and reassign employees. This is especially important as we consolidate our networks of mail pro-cessing facilities and realign our retail footprint.

On September 1, we began labor contract negotiations with the largest of our four unions, the American Postal Workers Union, AFL-CIO (APWU) with the goal of reaching agreement on actions to increase the Postal Service’s work-

force fl exibility and reduce costs. Similar nego-tiations with the National Rural Letter Carriers’ Association (NRCLA) began on September 13. Our past record of working successfully with labor to together to help transform the Postal Service provides encouragement that we will jointly reach agreement on these important goals.

While we prefer in all cases to manage these changes through collective bargaining, under existing law arbitration is always a possibility. Our fi rst priority in any arbitration ruling must always be the fi nancial health of the Postal Ser-vice and the affordability of postal products for the customers we serve. As such, we have also asked Congress to require that any arbitrator take into account our fi nancial condition before making any decision.

As we move forward, our ultimate goal is to ensure we have the right people in the right places at the right times to deliver the products and services our customers need, where and when they need them. We are hopeful that our current discussions with our labor partners will lead us toward the realization of this critical goal.

Finally, we never for a minute forget that our employees are the Postal Service. They deliver for America with commitment, dedication and purpose, and it is to their credit that the Postal Service has met extraordinary standards of performance during the past decade, including last year. ■

CHALLENGE

The rigidity of our current workforce structure leaves us little fl exibility to adapt to changing circumstances and economic downturns.

SOLUTION

A more fl exible workforce that allows for a greater ability to reposition and reassign employees would allow us to better respond to marketplace demands.

Workforce Costs Are Expected to Rise Between 2010 and 2020

Percent increase per year

Source: McKinsey analysis, Global Insight

1.3–2.5

2.0–4.0

4.7–5.2

Infl ation (CPI at 1.9%)

wag

es

wor

kers

co

mpe

nsat

ion

heal

th in

sura

nce

prem

ium

s

Greater fl exibility in repositioning employees will drive major productivity and service improvements in the coming decade.



OUR CHECKLIST

Pricing

O ne of the highest priorities of the Postal Service is to provide affordable products and services to the American people.

Indeed, U.S. postage prices are among the least expensive in the world. At the same time, pricing is an important tool for ensuring that our products are competitively positioned in the marketplace and for generating revenue to maintain our long-term fi nancial stability. We strive always to strike the right balance between ensuring affordability for customers and respon-sibly preserving our long-term fi nancial health.

Current pricing constraints have severely hampered our ability to remain fi nancially solvent. The Postal Act of 2006 caps prices for every class of Mailing Services mail at the Consumer Price Index for All Urban Consum-ers (CPI-U), ignoring the key drivers of postal infl ation. This legal framework must be modifi ed to allow the Postal Service the fi nancial fl exibility we need to remain viable into the future. Simply put, we require the authority to adjust pricing to better refl ect market dynamics and to offset current and future volume and revenue declines.

In 2010, pursuant to the tenets of our March 2 Ensuring a Viable Postal Service for America: An Action Plan for the Future, we have actively pursued a number of initiatives to address our pricing constraints.

Perhaps most signifi cantly, on July 6, we submitted a fi ling with the Postal Regulatory Commission (PRC) seeking an average 5-6 per-cent exigent price increase for Mailing Services products. Such price increases beyond the Consumer Price Index are allowed in extraor-dinary circumstances under the Postal Act of 2006. Given the signifi cant volume declines we experienced during and after the recent reces-sion, and the continued potential for increasing net losses, we believe — and the PRC con-curred — that the current situation certainly qualifi es as extraordinary and exigent.

Unfortunately, the Postal Regulatory Com-mission recently announced its denial of our request. Encouragingly, however, the PRC recognized recent volume losses and acknowl-edged the larger fi nancial risk we face through the mandated prefunding of retiree health benefi ts. We will continue to pursue moderate

price increases as one part of a fair and bal-anced approach to ensuring mail service for all Americans well into the future.

We also are pursuing several legal modifi ca-tions related to pricing.

First, we are seeking to apply a single infl a-tion price cap to Mailing Services products as a whole, rather than specifi cally to each class of mail. Under this reformed structure, we would be able to adjust individual prices based upon market demand and unit costs, with prices for some classes rising above the rate of infl a-tion and prices for other classes rising at a lower rate. This pricing fl exibility is necessary in particular for products currently generating insuffi cient revenue to cover their costs.

As an organization that is funded through the sale of postage, and operates independently of taxpayer support, the Postal Service simply must have the authority to adjust its pricing to better refl ect market dynamics and offset future downturns in both volume and revenue. We will continue to pursue long-term solutions that allow greater pricing authority and fl exibility, enabling us to continue providing the very best service to the American people. ■

CHALLENGE

Current pricing constraints hamper our ability to price products and services appropriately and to raise needed revenue.

SOLUTION

Obtaining greater pricing authority and fl exibility would allow the Postal Service to adjust pricing to better refl ect market dynamics and offset future volume and revenue declines.

Innovative, competitive pricing is a vital tool for ensuring the fi nancial strength of the Postal Service.



OUR CHECKLIST

Expand Products and Services

I n 2010, the U.S. Postal Service had another strong year in terms of expanding product and service offerings to better meet evolving

customer needs. We continued to build on our successful 2009 offerings, and made important strides along the path to enhance the value of the mail for business and residential customers.

Throughout 2010, for example, we extended and expanded our successful Priority Mail fl at rate shipping offering, supported by an award-winning advertising campaign. This service allows customers to ship for a low, fl at rate to anywhere in the country. For optimal conve-nience, at prioritymail.com, customers can even take a picture of an item and determine the size of the fl at rate box required. We also continued sale promotions, offering pricing incentives of 30 percent on Standard Mail volumes above a cer-tain threshold, and a First-Class Mail Incentive

Program, offering a 20-percent credit at certain volume levels.

Anticipating what customers need before they need it allows a business to stay relevant and ahead of competitors. Success for the Postal Service means nothing less. Technology and customer needs are changing rapidly in today’s world, and the Postal Service is adapting so that customer needs and expectations are not only met, but exceeded.

The success of new products and services like fl at rate boxes, along with sales and rebate programs, demonstrate that our creative think-ing and new ideas signifi cantly benefi t the Postal Service and our customers. We will continue to bring to market products and services that our customers value, improve our speed to market and continue to innovate — that is our mission and our commitment to the American people. ■

CHALLENGE

Adapting to the changing mailing needs of the American public.

SOLUTION

Heightened emphasis on product and service innovations.

Many Post Offi ce lobbies are offering new products and services — including holiday and gift cards.

We give back to the communities in which we work. We support efforts to raise awareness about important social concerns. Our Breast Cancer Research semipostal stamp has raised more than $71 million for breast cancer research since 1998.

Social Awareness



OUR CHECKLIST

Oversight

W hen Congress last modifi ed the Postal Service’s oversight model in 2006, our mail volumes were increasing. Howev-

er, the recent recession and trends in our current business environment have caused dramatic de-creases in mail volumes. Declining mail volumes in the coming decade will require new fl exibility as a business and in our oversight model.

Our current oversight structure includes Congress, portions of the Executive Branch, the Government Accountability Offi ce, and the Postal Service Inspector General, as well as by Presidentially-appointed Governors and the Postal Regulatory Commission.

These authorities oversee everything from pricing and products to postal networks and Sarbanes-Oxley Act compliance. However, in this highly constrained environment, it is diffi cult for the Postal Service to quickly and artfully adapt and respond to the rapidly changing world in which we — and our customers — live.

If stakeholders want the Postal Service to move more rapidly and aggressively, these

authorities need to be equally nimble. We must be able to move as quickly to market as our competitors in order to succeed. A more clearly defi ned and practically workable and stream-lined oversight process would enable the Postal Service to bring products to market faster and make business decisions with greater certainty and fl exibility, and compete more effectively.

Our future viability is predicated on a holistic view of improvement, including a thoughtful reassessment of oversight roles and processes that support other aspects of the plan. We have taken the critical steps internally of increasing transparency and accountability, since 2006. However, changes in law — such as time limits on reviews and after-the-fact reviews — are also necessary.

We continue to seek these changes and look forward to working with all interested parties to do so. Together, we can ensure a Postal Service that can respond nimbly to challenges and opportunities that come our way, now and in the future. ■

CHALLENGE

Overlapping layers of governance hamper speed to market and quick decision making.

SOLUTION

Streamline oversight by redefi ning regulatory roles and processes.

The Postal Service is working with Congress to establish a more fl exible business model to better meet the evolving mailing needs of the American people.


As the governing body of the Postal Service, the 11-member Board of Governors has responsibilities comparable to a board of directors of a publicly held corporation. The Board is comprised of nine Governors appointed by the President of the United States with the advice and consent of the Senate. No more than fi ve Governors can be members of the same political party.

The other two members of the Board are the Postmaster General and the Deputy Postmaster General. The Governors appoint the Postmaster General, who serves at their pleasure without a specifi c term of offi ce. The Governors, together with the Postmaster General, appoint the Deputy Postmaster General.

Chairman Louis J. Giuliano, James H. Bilbray, Ellen C. Williams, Dennis J. Toner, Carolyn Lewis Gallagher, James C. Miller III, Alan C. Kessler, Mickey D. Barnett, Vice Chairman Thurgood Marshall, Jr.

The Board of Governors


Louis J. Giuliano Appointed November 2004. Term expires December 2014. Chairman since January 2010. Vice Chairman, February 2009 to January 2010. Chairman, Operations Subcommittee. Member, Compensation and Management Resources Committee. Former Chairman of Board of Directors, President and Chief Executive Offi cer of ITT Corp. Director of the John Maneely Company and Senior Advisor at the Carlyle Group.

Thurgood Marshall, Jr. Appointed December 2006. Term expires December 2011. Vice Chairman since January 2010. Chairman, Government Rela-tions and Regulatory Committee. Member, Audit and Finance Committee. Partner at Bingham McCutchen and principal with Bingham Consulting Group. Served President Clinton as former Assistant to the President and Cabinet Secretary. Former Direc-tor of Legislative Affairs and Deputy Counsel for Vice President Gore. Director, Corrections Corporation of America.

Mickey D. Barnett Appointed August 2006. Term expires December 2013. Mem-ber, Governance and Strategic Planning Committee. Member, Audit and Finance Committee. Attorney in Albuquerque, New Mexico. Former member, New Mexico State Senate. Former member, Appellate Nominating Commission for the New Mexico Supreme Court of Appeals. Former Legislative Assistant to Senator Pete Domenici of New Mexico.

James H. Bilbray Appointed August 2006. Term expires December 2015. Mem-ber, Governance and Strategic Planning Committee. Member, Government Relations and Regulatory Committee. Attorney in Las Vegas, Nevada. Former member, U.S. House of Represen-tatives from Nevada. Former member, Nevada State Senate. Former Deputy District Attorney in Clark County, Nevada.

Carolyn Lewis Gallagher Appointed November 2004. Term expired December 2009; now serving hold-over term expiring December 2010. Member, Com-pensation and Management Resources Committee. Past Chair-man, February 2009 to January 2010. Former President and CEO of Texwood Furniture, Inc. Former Trustee and Chairman, Texas Employees’ Retirement System. Appointed by President Bush in 2003 to serve on the President’s Commission on USPS.

Alan C. Kessler Appointed November 2000. Serving second term, expiring De-cember 2015. Past Chairman, January 2008 to January 2009. Vice Chairman, January 2005 to January 2008. Chairman, Gov-ernance and Strategic Planning Committee. Partner at Duane Morris, LLP. Former Vice Chair of the Presidential/Congressional

Commission on Risk Assessment and Risk Management. For-mer member of the Electoral College, Pennsylvania. Serves on Boards of the Greater Philadelphia Chamber of Commerce and the Philadelphia Industrial Development Corp. Former commis-sioner for Lower Merion Township, PA. Member, Philadelphia City Planning Commission. Member, Executive Committee of Philadelphia 2000. Chairman, Pennsylvania Supreme Court Continuing Legal Education Board.

James C. Miller III Appointed April 2003. Term expires December 2010. Past Chair-man, January 2005 through January 2008. Chairman, Audit and Finance Committee, and member, Governance and Strategic Planning Committee. Senior Advisor, Husch Blackwell Sand-ers, LLP. Senior Fellow, Hoover Institution at Stanford Univer-sity. Member of Boards of Washington Mutual Investors Fund, America Fund Tax-Exempt Series I, the JP Morgan Value Op-portunities Fund and Clean Energy Fuels Corp. Former Director, U.S. Offi ce of Management and Budget, 1985 to 1988. Former Chairman, U.S. Federal Trade Commission, 1981 to 1985.

Dennis J. Toner Appointed September 2010. Term expires December 2012. Member of the Compensation and Management Resources Committee. Founder and principal since 2006 of Horizon Advisors. Deputy Chief of Staff, to then-Senator and now-Vice President Joseph Biden, Jr. 1995 to 2005.

Ellen C. Williams Appointed August 2006. Term expires December 2014. Chair-man, Compensation and Management Resources Committee, and member, Government Relations and Regulatory Commit-tee. Principal, government affairs and lobbying fi rm. Former Vice Chairman, Kentucky Public Services Commission. Former Com-missioner, Governor’s Offi ce for Local Development in Kentucky. Former Chairman, Kentucky Republican Party. Staff assistant to former U.S. Representative Larry Hopkins.

John E. Potter Appointed 72nd Postmaster General and Chief Executive Offi -cer of the United States Postal Service in June 2001. Potter has served as Chief Operating Offi cer and Executive Vice President; Senior Vice President, Operations; Senior Vice President, Labor Relations; and Manager, Capital Metro Operations.

Patrick R. Donahoe Appointed 19th Deputy Postmaster General in April 2005. Do-nahoe is Chief Operating Offi cer and has served as Senior Vice President, Operations; Senior Vice President, Human Resourc-es; and Vice President, Allegheny Area Operations.


Joseph CorbettChief Financial Offi cer and Executive Vice President

Marie Therese DominguezVice President, Government Relations and Public Policy

Paul VogelPresident, Mailing and Shipping Services

Linda A. KingsleySenior Vice President, Strategy and Transition


Patrick R. DonahoeDeputy Postmaster General and Chief Operating Offi cer

Stephen M. KearneySenior Vice President, Customer Relations

Ross PhiloChief Information Offi cer and Executive Vice President

Anthony J. VeglianteChief Human Resources Offi cer and Executive Vice President

Mary Anne GibbonsSenior Vice President, General Counsel

The Executive Committee

The Executive Committee of the U.S. Postal Service is a decision-making body and its members serve as senior advisors to the Postmaster General. It meets frequently and as necessary to consider topics of importance to the Postal Service.


Other Offi cers

Drew T. Aliperto Vice President, Area Operations (Pacifi c)

Mitzi R. BetmanVice President, Corporate Communications

Sylvester Black Vice President, Area Operations (Western)

Megan J. Brennan Vice President, Area Operations (Eastern)

Susan M. Brownell Vice President, Supply Management

Ellis A. Burgoyne Vice President, Area Operations (Southwest)

William A. Campbell Judicial Offi cer

James P. CochraneVice President, Product Visibility and Operational Performance

Guy J. CottrellChief Postal Inspector

Thomas G. DaySenior Vice President, Intelligent Mail and Address Quality

Vincent H. DeVito Vice President, Controller

John T. Edgar Vice President, Information Technology Solutions

Jo Ann Feindt Vice President, Area Operations (Great Lakes)

Steven J. Forte Senior Vice President, Operations

Deborah Giannoni-Jackson Vice President, Employee Resource Management

Dean J. Granholm Vice President, Delivery and Post Offi ce Operations

Timothy C. HaneyVice President, Area Operations (Cap Metro)

Timothy C. Healy Vice President, Retail Products and Services

Delores J. Killette Vice President, Consumer Advocate

Susan M. LaChance Vice President, Employee Development and Diversity

Stephen J. Masse Vice President, Finance and Planning

Pritha N. MehraVice President, Business Mail Entry and Payment Technologies

Julie S. MooreSecretary of the Board of Governors

Susan M. Plonkey Vice President, Sales

Samuel M. PulcranoVice President, Sustainability

Gary C. ReblinVice President, Shipping Services

Maura RobinsonVice President, Pricing

Tom A. Samra Vice President, Facilities

Pranab Shah Vice President and Managing Director, Global Business

Kelly M. SigmonVice President, Engineering

Jordan M. SmallVice President, Area Operations (Northeast)

Douglas A. Tulino Vice President, Labor Relations

Linda J. Welch Vice President, Area Operations (Southeast)

David E. Williams Vice President, Network Operations


T he role of the Audit and Finance Commit-tee is to assist the Board of Governors in fulfi lling its fi duciary responsibilities. Com-

mittee members are selected by the Chairman of the Board. This year the Committee, whose current members include Governors Mickey D. Barnett and Thurgood Marshall, Jr., and me, met seven times.

The Committee’s primary responsibility is oversight of the integrity of the Postal Service’s fi nancial statements and the soundness of its accounting and internal control practices. The independent public accounting fi rm engaged to perform the annual audit of Postal Service fi nancial statements, Ernst & Young LLP, reports to the Board through the Committee. The Postal Inspector General, who reports to the Gover-nors, is represented at all Committee meetings.

During this fi scal year, the Committee fo-cused on:

■ Management initiatives to stabilize the Postal Service’s fi nancial condition through com-prehensive cost-reduction programs and revenue-enhancement efforts in response to continued weakness of the U.S. economy and the diversion of letter mail to electronic alternatives;

■ Monitoring progress toward 2010 compliance with Section 404 of the Sarbanes-Oxley Act of 2002 (SOX);

■ Reviewing efforts to increase the effi ciency and effectiveness of internal controls;

■ Successful fi ling of fi nancial reports in compli-ance with Securities and Exchange Commis-sion (SEC) reporting rules; and

■ Evaluating analyses from Accenture, Boston Consulting Group and McKinsey & Company that contributed to the development of our ten-year action plan, Ensuring a Viable Postal Service for America: An Action Plan for the Future.

The Committee closely reviewed fi nancial results, forecasts and cash fl ow projections at each meeting and advised the full Board as to its conclusions.

The Committee continues to monitor de-velopments in the cyber-security fi eld as they relate to Postal Service operations. As informa-tion technology security is integral to Postal Service systems and the protection of custom-er, employee and business data, we continue to receive regular updates on cyber-security issues, and to carefully assess these updates as they come in.

The Committee received regular briefi ngs on the organization’s efforts to meet SOX require-ments and progress toward certifi cation. Due to the comprehensive scope, magnitude and reach of the Postal Service nationwide, the or-ganization’s SOX compliance program is one of the largest and most complex implementations on record since enactment of the legislation in 2002. The Committee provided oversight on the strategic direction and guidance on deci-sions related to readiness, process improve-ment opportunities and ongoing compliance initiatives.

We are proud to report that the Postal Service not only completed its third full fi scal year in compliance with SEC reporting rules but also achieved the signifi cant milestone of successfully implementing full SOX compliance. The Committee was pleased with the quality

James C. Miller IIIChairman, Audit and Finance Committee

Message from the Audit and Finance Committee


of disclosures in required fi nancial fi lings each quarter, and commends management for its ongoing commitment to increased transpar-ency and accountability. The successful imple-mentation of SOX, in an organization as large and complex as the Postal Service, is a truly impressive achievement.

In directing the conduct of the 2010 fi nancial statement audit, the Committee met with Ernst & Young LLP, and approved the scope and materiality levels they established in their work plan. The Committee met jointly and indepen-dently with Chief Financial Offi cer Corbett and his staff, Ernst & Young LLP, Inspector General David Williams, and General Counsel Gibbons throughout the year to discuss the progress of the audit and to ensure independence and objectivity in all audit programs.

As a result, the Committee recommended, and the Board approved, the fi nancial state-ments for 2010.

James C. Miller IIIChairmanAudit and Finance Committee

“The Postal Service not only completed its third full fi scal year in compliance with SEC reporting rules but also achieved the signifi cant milestone of successfully implementing full SOX compliance.”



Message from the Chief Financial Offi cer and Executive Vice President

As fi scal year 2010 comes to a close, we can look back on a year marked both by signifi cant fi nancial challenges and by

impressive achievements in setting a founda-tion for a strong, enduring and fi nancially viable Postal Service. To the extent that adversity reveals character, the Postal Service demon-strated great focus on service and commitment to the customer, and took signifi cant steps to adapt to America’s evolving mailing needs.

To be sure, the Postal Service is still contend-ing with the effects of the severe economic downturn that began in late 2007, and our mail volumes are increasingly impacted by greater customer reliance on digital communications. These factors resulted in a 2010 mail volume decline of 3.5 percent. Indeed, we have expe-rienced a 20 percent loss of mail volume over the past four years. For an organization struc-tured with a high percentage of fi xed costs and numerous business model constraints, the road back to profi tability remains an uphill climb. And we are climbing that hill aggressively.

In March of this year, we outlined a far-reaching Action Plan for the Future to transition to a more fl exible business model, to become a leaner and more nimble organization, and to better meet the mailing and shipping needs of the American people for decades to come. Our plan described actions we are undertak-ing within our current model to get onto solid fi nancial ground. Our plan also recommended changes in the law to loosen signifi cant busi-ness model constraints that hinder cost control, product and service offerings, speed to market, and fl exibility in leveraging the full value of our workforce.

By year’s end, excluding contractual cost in-creases, we had reduced more than $3 billion in costs across the organization, including work-hour reductions of 75 million hours. This reduc-tion is equivalent to 43,000 full-time employees — larger than the total workforce of more than 31 percent of Fortune 500 companies. This impressive achievement demonstrates our steadfast commitment to this endeavor. At the same time, we are equally focused on generat-ing revenue, for example, through pricing incen-tives for large-volume mailers, seasonal sales, widespread promotion of our fl at-rate shipping options and a reorganized sales force.

Despite impressive cost-cutting to right-size and realign Postal Service operations with lower mail volume and revenue levels, we recorded a loss of $8.5 billion for the fi scal year. Of this amount, $5.5 billion was due to an annual, leg-islatively mandated obligation to prefund retiree health benefi ts.

Due to the current and projected near-term weakness in overall economic conditions, we will continue to be aggressive in removing costs from our system where possible and in identify-ing additional opportunities for savings through increased fi nancial controls and streamlined processes.

This past year also marked our initial report-ing on internal controls under section 404 of the Sarbanes-Oxley Act of 2002 (SOX), meet-ing the mandated SOX compliance deadline for fi scal year 2010. As one of the largest organizations in the United States — whether measured by revenue, number of facilities, number of employees or signifi cance to the overall economy — the Postal Service imple-



mented one of the largest and most complex SOX certifi cation programs ever completed, including the following:

■ Documented more than 70 internal pro-cesses that materially impact USPS fi nancial reporting;

■ Performed more than 2,000 tests of internal fi nancial controls, including more than 1,000 key SOX controls; and

■ Tested more than 2,000 general computer controls in more than 70 in-scope IT systems.

The accomplishments necessary to attain SOX compliance were remarkable and required both internal change and changes by our cus-tomers, suppliers, business partners and others in the mailing industry. I thank our staff and the entire industry for helping reach this important milestone.

Although we anticipate continued fi nancial challenges in fi scal year 2011 and beyond, our goal is to set our fi nances on a fi rmer footing, and continue to innovate, drive out costs and be as effi cient as possible. We remain proud to deliver on our promise to deliver trusted, af-fordable products and services to the American people. We remain fi rmly committed to afford-ably serving the needs of the American public and businesses far into the future.

“In March of this year, we outlined a far-reaching Action Plan for the Future to transition to a more fl exible business model, to become a leaner and more nimble organization, and to better meet the mailing and shipping needs of the American people for decades to come.”

THE 2011 COMMEMORATIVE

STAMP PROGRAM

PIONEERS OF AMERICAN INDUSTRIAL DESIGN

LATIN MUSIC LEGENDS

ROMARE BEARDEN

AMERICAN TREASURESEDWARD HOPPER

JAZZ APPRECIATION

Stamps By Design


LOVEGARDEN OF LOVE

LEGENDS OF HOLLYWOODGREGORY PECK

LITERARY ARTSMARK TWAIN

AMERICAN SCIENTISTS

MERCURY/MESSENGER

HELEN HAYES


BLACKHERITAGEBARBARA JORDAN

CIVIL WAR: 1861

U.S. MERCHANT MARINE


HOLIDAY STAMPSHOLIDAY BAUBLES

MADONNA OF THE CANDELABRA BY RAPHAEL

LUNAR NEW YEARYEAR OF THE RABBIT

INDIANAPOLIS 500

OWNEY THE POSTAL DOG

FLAGS OF OUR NATION

KANSASSTATEHOOD



Introduction to the Financial Section

Beginning in 2008, the United States Postal Service began issuing quarterly and annual fi nancial statements in accordance with Securities and Exchange Commission guidelines. Our fi nancial reports are submitted to the Offi ce of Management and Budget and the Postal Regulatory Commission, and are available on-line at www.usps.com. The Postal Service adheres to Generally Accepted Accounting Principles. In 2010, the Postal Service complied with Section 404 of the Sarbanes-Oxley Act (SOX) as mandated by the Postal Accountability and Enhancement Act of 2006. This was one of the largest successful SOX implementations on record and the fi rst within the federal government. In the following section, please fi nd the annual fi nancial statement of the United States Postal Service for fi scal year 2010.

2010 Annual Report United States Postal Service 292010 Annual Report United States Postal Service 29

30 2010 Annual Report United States Postal Service30 2010 Annual Report United States Postal Service



























































TrademarksThe following are among the trademarks owned by the United States Postal Service: ACS™, APC®, Automated Postal Center®, Carrier Pickup™, CASS™, CASS Certifi ed™, Certifi ed Mail™, Click-N-Ship®, Confi rm®, Customized MarketMail®, Delivery Confi rmation™, DMM®, EPM®, Express Mail®, FAST®, FASTforward®, First-Class™, First-Class Mail®, Full-Service ACS™, IM™, IMb™, Intelligent Mail®, LACSLink™, MASS™, MERLIN®, Mover’s Guide®, NCOALink®, Netpost®, Netpost Mailing Online™, OneCode ACS®, OneCode Confi rm®, OneCode Solution™, OneCode Vision®, Parcel Post®, Parcel Select®, PC Postage®, PLANET®, PLANET Code®, Post Offi ce™, PostalOne!®, Postal Service™, POSTNET™, Priority Mail®, Quick, Easy, Convenient™, RDI™, ReadyPost®, REDRESS®, Registered Mail™, RIBBS®, Signature Confi rmation™, Simple Formulas®, Stamps by Mail®, Standard Mail®, The Postal Store®, United States Postal Service®, U.S. Mail™, U.S. Postal Service®, USPS®, USPS Electronic Postmark®, USPS.COM®, www.usps.com®, ZIP+4®, and ZIP Code™. This is not a comprehensive list of all Postal Service trademarks.

Mail.dat®, Mail.XML® and IDEAlliance® are trademarks owned by the International Digital Enterprise Alliance.

Year ReferencesAll references to a specifi c year or “the year” refer to the Postal Service fi scal year ending September 30. However, specifi c month and year references pertain to the calendar date.

The Annual Report of the United States Postal Service is published by:

United States Postal ServiceCorporate Communications475 L’Enfant Plaza, SWWashington, DC 20260-3100

Read our Annual Report online at: www.usps.com/fi nancials/_pdf/annual_report_2010.pdf

© 2010 United States Postal Service. All rights reserved.

475 L’Enfant Plaza SWWashington DC 20260-3100

Military mail photos, inside back cover, clockwise from top: U.S. Navy photo by Mass Communication Specialist Seaman Apprentice Shonna Cunningham (Released). Photo by MC3 Matthew Bookwalter. U.S. Navy photo by Photographer’s Mate 1st Class Arlo K. Abrahamson (Released). Photo by Lance Cpl. Megan Sindelar.

Military Mail

Mail is the touchstone that keeps America connected — and is even more so for the men and women who serve our country in the military every day, away from family, friends and loved ones.

The Postal Service uses its international distribution and transportation services and partners with the Department of Defense for overseas military mail delivery — even in war zones. In fact, between the Thanksgiving and Christmas holidays this year, nearly 30 million pounds of mail will be delivered to troops in Afghanistan and Iraq.

Every day nearly half a million pounds of mail is shipped from the U.S. to ser-vice men and women stationed around the world. That’s half a million pounds of news from home, love, support and wishes for a safe return — all through the U.S. Mail. ■

Documents

2010 Annual Report - about.usps.com2 2010 Annual Report United States Postal Service Financial Highlights 2010 was a difﬁ cult year for both the U.S. economy and the Postal Service